US UpdateNo recession, but slower growthNordea Research, 29 November 2011 While the US economy looks healthier in the near No US recession unless the Euro-area term, there are reasons to believe that growth will financial crisis turns out to be more severe slow in H1 2012. than assumed. First, the financial crisis in the Euro area is Another credit crunch is a risk that will likely to act as a drag on US growth. hang over the US economy until the Second, considering the decline in net wealth problems in Europe are resolved once and sustained high unemployment US and for all. households are unlikely to continue dipping US fiscal policy is another significant into their savings to increase spending. threat to our relatively optimistic story for Third, increasing federal fiscal restraint the US economy. suggests growth is likely to slow in the near The pick-up in GDP growth in H2 2011 will term. not be sustained in H1 2012 as both No US recession, but slower growth in H1 foreign and domestic headwinds will hold 2012 back activity temporarily. 6 % USA 6 Forecast % 4 GDP, q/q ar 4 We expect the Fed’s next policy move to 2 2 be in the form of strengthening its pledge to keeping rates low for long. However, 0 0 QE3 is not expected unless the US -2 -2 GDP, y/y economy shows clear signs of a new -4 -4 recession or if European banks were to -6 -6 collapse. -8 -8 -10 -10 04 05 06 07 08 09 10 11 12 13No recession unless the Euro area melts Source: Nordea Markets and Reuters EcowindownRecent economic data clearly suggest that the US Our GDP model points to continued positiveeconomy has more momentum than there seemed to growth, but at a modest pacebe just a few months ago when the risk of a new USrecession was a major concern. Thus, even asgrowth in Asia slows and the Euro area falls backinto recession, Q4 US GDP growth is currently ontrack to top the 2% annualised pace recorded in Q3.This underscores that the primary US recessionrisks are from external shocks, with a worsening ofthe Euro-area financial crisis as the most importantthreat to our forecast that the US economy willcontinue to expand next year. However, US fiscalpolicy is another significant risk factor.All in all, we now look for US GDP growth of Given the outlook of weak and fragile economic1.7% in both 2011 and 2012 and 2.6% in 2013 (see growth unemployment is forecast to remain close totable on last page). In our August issue of 9% during most of the forecast period. The overallEconomic Outlook the forecast was 1.3%, 1.6% and CPI inflation rate is estimated to have peaked, and2.7% in 2011-2013. we look for a drop to below 2% during the period. Core inflation, which currently is boosted by higher rents and other components, is expected to start
declining in 2012 towards 1.5% as economic slack activity, as well as a significant slowdown in globalwill remain high. growth. It is encouraging that despite the economicForeign headwinds slowdown seen in H1 2011 and the uncertaintyLooking only at the trade linkages, the Euro-area generated by the debt ceiling debacle and resultingcrisis is not much of a threat to the US. US exports credit rating downgrade of US Treasuries over theto the GIIPS (Greece, Italy, Ireland, Portugal and summer, US banks have not tightened their lendingSpain) amount to only 0.2% of US GDP, while US standards. But the real danger is that the events inexports to the whole Euro area are only 1.6% of US Europe trigger a sharp fall in the willingness of USexports (see table). banks to lend.US exposure to the Euro area Financial and trade links in Q2 2011 (USDbn and % of GDP) Another credit crunch is a risk that will hang over GIIPS Rest of Euro area TotalTrade the US economy until the problems in Europe areUS exportsUS imports 37 94 0.2% 0.6% 164 206 1.3% 1.4% 200 300 1.6% 2.0% resolved once and for all.FinanceForeign claims of US banks 181 1.2% 705 4.7% 886 5.9% Banks’ Tier 1 capital ratio at a record high- Public sector 26 0.2% 109 0.7% 135 0.9%- Banks 64 0.4% 375 2.5% 439 2.9%Other potential exposures 587 3.9% 1,328 8.8% 1,915 12.8%- Guarantees extended (CDS) 1 518 3.4% 1,118 7.4% 1,636 10.9%Total financial risk 767 5.1% 2,033 13.5% 2,800 18.7%1) Measured in terms of gross notional values of CDS sold byUS banks. Source: BIS, Nordea Markets and Reuters Ecowin.Thus, a mild recession in line with our forecast forthe Euro area – or even a severe recession – isunlikely by itself to pull the US economy intorecession. (For more on our new Euro-area forecast,see The Euro area in debt crisis maelstrom, 29November 2011).However, the financial linkages between the USand the Euro area represent the much bigger threat Domestic headwindsto the US economy. Thus, with US direct and Persistent domestic headwinds are also likely toindirect financial exposure to the PIIGS estimated hold back activity in early 2012.at USD 767bn (5.1% of US GDP) and to the whole The recent strength in US consumer spendingEuro area at around USD 2,800bn (18.7% of US growth has only been possible because householdsGDP) US banks are heavily exposed to the Euro have been willing to dip into their savings. Thus,area. over the past year spending has increased at a fasterThis clearly suggests that the unfolding crisis in the pace than disposable income. As a consequence, theEuro area is by far the biggest threat to our savings rate has declined to 3.8% in Q3 2011,relatively optimistic story for the US economy. which is the lowest level since the recession began, down from its recent 6.2% peak.While predicting the extent and timing of Europeanbank failures is impossible, our baseline scenario Recent GDP growth largely driven byassumes that the Euro-area crisis is eventually consumer spendingresolved in an orderly manner. Hence, our forecastthat the US economy will gain more traction in H22012 is partly based on the assumption that theEuropean financial crisis will start abating duringH1 2012.However, even though US banks are definitely in amuch stronger position now than they were in thefall of 2008, when Lehman failed, a more severeand disruptive Euro-area scenario, with a string ofEuropean bank failures for example, would likelyinduce a significant downturn in US economic
Obviously, this cannot go on for ever. As a matter estimate the fiscal drag amounts to about 1% ofof fact, we do not believe fundamentals support the GDP in both 2012 and 2013 (see chart).recent strength in consumption. Thus, our model Substantial fiscal restraint in 2012 and 2013estimations suggest that the Q3 savings rate is at 1.0 1.0least 1½% point too low given fundamental factors 0.5 %-points Fiscal policy impact on GDP growth %-points 0.5like the level of interest rates, net wealth and 0.0 0.0unemployment (see chart). -0.5 -0.5Savings rate at its lowest since Q4 2007 -1.0 -1.014 % Personal savings rate % 14 -1.5 -1.512 Out-of- 12 -2.0 -2.0 Actual sample10 forecast 10 -2.5 -2.5 Current law Current policy 8 8 -3.0 -3.0 6 6 -3.5 -3.5 2011 2012 2013 4 4 Model forecast and 2 2 Note: The “Current law” scenario is based on the assumption 95% confidence interval that current legislation determining policy is left unchanged. 0 Note: The model is based on 10Y Treasury yield (+), net financial 0 Specifically, the 2011 payrolls tax cut and the extended wealth (-), housing wealth (-), unemployment (+) and consumption of unemployment benefits are assumed to expire by end-2011,-2 -2 nondurables and energy services as share of disposable income (+).-4 Sample 1960-2006. R² = 0.88 -4 while the 2001 and 2003 Bush tax cuts are assumed to expire by 70 75 80 85 90 95 00 05 10 end-2012. In the “Current policy” scenario all these measures are assumed extended through 2013. Source: Nordea Markets Source: Nordea Markets and Reuters Ecowin and Congressional Budget Office.As a consequence, we expect consumer spending to But there is a risk of an even larger amount of fiscalslow in H1 2012 as the savings rate adjusts to a restraint. Thus, if the 2011 payroll tax break of 2%more sustainable level. points and the extended unemployment benefitsMore generally, spending growth is expected to period to 99 weeks, both due to expire at year-end,remain subdued for at least another year or so as are not extended by Congress, the fiscal draghouseholds continue paying down debt. If debt increases to about 2% of GDP next year.continues to fall at the rates seen over the past two With the fiscal Super Committee’s failure to reachyears, then the debt-to-GDP ratio will reach the a deficit-cutting agreement there is now a greater85% threshold by the end of 2012, at which debt risk that these measures expire by the end of thisgenerally no longer seems to act as a drag on year. In that case the resulting fiscal tighteningeconomic growth. (For more analysis see our would likely cause a very sharp slowdown alreadyresearch note Are we all turning Japanese? released in Q1 next year.28 September 2011). However, we still expect (read: hope) that anAdmittedly, the combination of record-low extension of the payroll tax cut and the emergencymortgage rates and new policies to allow more unemployment benefits will be attached to a year-households to refinance their mortgages to a lower end spending bill.rate may help supporting consumer spending. For 2013, our forecast assumes that the tax cutsHowever, this is unlikely to be enough to restore passed under the Bush administration in 2001 andequilibrium in the housing market anytime soon, 2003, due to expire by end-2012, will also bebecause the inability of many households to qualify extended. If not, the fiscal drag increases fromfor a mortgage is still holding demand at around 1% to 3% of GDP in 2013.historically very weak levels.As a result, we expect home prices to drop another Fed on hold5% before turning around next year. Against this background the Fed will likely continue leaving the door open for more easing.Increasing fiscal restraint We expect the Fed’s next policy move to be in theFinally, federal fiscal policy will act as a substantial form of strengthening its pledge to keeping ratesdrag on growth in 2012 and 2013 as previous low for long. This could happen by includingeasing measures are phased out. forecasts of the fed funds rate in the FOMC’sUnder current policy, which in our baseline for the projections and/or by specifying the economicUS economy is assumed to be extended, we conditions that would warrant an exit from the Fed’s current policy. (Chicago Fed President Evans
has already pushed the idea of announcing explicit But pumping out cheap liquidity implies a clear risktargets for the unemployment rate and inflation rate of new bubbles and high inflation. Therefore it isas conditions for keeping the Fed funds rate near also our impression that the Fed – also in responsezero). to pressure from other central banks – will adopt quite an aggressive pace once the economy allowsNot least due to the unprecedented political gradual monetary policy normalisation.pressure on the Fed, a return of balance sheetexpansion (QE3) seems like a last resort. We expect the first rate hike in mid-2013, assuming that the downside risks to the economic outlook doHowever, if the economy shows clear signs of a not materialise. By end-2013 the fed funds rate isnew recession or if European banks were to seen at 1.75%.collapse we would expect the Fed to step in andlaunch QE3, even if Operation Twist, which is setto continue until mid-2012, had not been concluded. Johnny Bo JakobsenSuch a programme would likely focus on mortgage- firstname.lastname@example.org +45 3333 6178backed securities.USA: Macroeconomic forecast (% annual real changes unless otherwise noted) 2008 (USDbn) 2009 2010 2011E 2012E 2013EPrivate consumption 10,035.5 -1.9 2.0 2.2 1.5 2.3Government consumption and investment 2,878.1 1.7 0.7 -2.0 -1.2 -0.9Private fixed investment 2,128.7 -18.8 2.6 6.7 6.0 6.9 - residential investment 472.4 -22.2 -4.3 -1.8 2.7 8.1 - equipment and softw are 1,070.0 -16.0 14.6 10.3 6.9 6.8 - non-residential structures 586.3 -21.2 -15.8 4.6 5.6 5.9Stockbuilding* -41.1 -0.8 1.6 -0.3 -0.2 0.1Exports 1,846.8 -9.4 11.3 6.7 3.3 6.5Imports 2,556.5 -13.6 12.5 4.7 1.3 4.7GDP -3.5 3.0 1.7 1.7 2.6Nominal GDP (USDbn) 14,291.6 13,938.9 14,526.6 15,056.1 15,595.4 16,310.2Unemployment rate, % 9.3 9.6 9.0 9.1 8.6Industrial production, % y/y -11.2 5.3 4.1 2.2 3.6Consumer prices, % y/y -0.3 1.6 3.2 2.0 1.8Consumer prices ex. energy and food, % y/y 1.7 1.0 1.6 1.6 1.6Hourly earnings, % y/y 3.0 2.4 1.8 1.6 1.5Current account (USDbn) -376.6 -470.9 -451.7 -467.9 -570.9 - % of GDP -2.7 -3.2 -3.0 -3.0 -3.5 Federal budget balance (USDbn) -1,471.3 -1,275.1 -1,290.0 -1,190.0 -840.0 - % of GDP -10.6 -8.8 -8.6 -7.6 -5.2 Gross public debt, % of GDP 86.4 94.5 103.1 110.7 115.8* Contribution to GDP growth (% points)Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S.The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are thecurrent views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or therisks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase orsale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particularrecipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is notindicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.